CRUCIAL CHANGES AHEAD FOR ECUADOR'S OIL, GAS SECTOR

Ecuador's oil and gas sector stands at the crossroads of change.

Controversy continues to swirl around the roles of government and foreign companies in the country's petroleum industry. As with other Latin American countries, Ecuador is caught up in a drive toward privatization and free market reforms.

Because the oil sector is Ecuador's economic engine, many policy decisions in that arena are likely to be controversial, notably efforts to end or even trim domestic fuel subsidies. The latter resulted in the ouster of Ecuador's minister of energy, Diego Tamariz, who was censured by the country's congress earlier this month after raising fuel prices (OGJ, Mar. 18, Newsletter). Tamariz resigned, replaced by Donald Castillo, who promptly vowed to continue Tamariz'policies even if it means his dismissal.

The newly restructured state oil company, Petroleos del Ecuador, continues an ambitious program of broadening its role in Ecuador's oil sector. That also entails ending Texaco Inc.'s long dominance of operations in the Oriente basin, backbone of Ecuador's production.

At the same time, the government is stepping up efforts to attract more foreign investment in Ecuadorian exploration and development. Heeding oil officials' warnings that declining oil production replacement-reserves fell the third year in a row in 1990-and increasing domestic demand threaten Ecuador's future oil exports, the government implemented risk/service contracts in 1982. As a result, E&D activity has increased among foreign companies in Ecuador in addition to a stepped up program by Petroecuador (OGJ, May 28, 1990, p. 44).

Because most of that effort will target the country's most prospective area, the Oriente basin of the Amazon rain forest that covers much of eastern Ecuador, the higher profile for E&D is spurring environmental and Indian concerns for foreign companies in Ecuador (OGJ, Jan. 7, p. 92). In the latest such development, Texaco and Petroecuador and affiliate Petroproduccion were fined a total of $22,000 for allegedly failing to prevent Oriente oil spills. Ecuador's environmental undersecretary last week fined Texaco $8,000 for spilling crude from a well in the Oriente, Petroecuador $8,000 for spilling oil into an Oriente stream, and Petroproduccion $6,000 for an oil spill by a truck on Lago Agrio highway.

It adds to an increasingly complicated outlook for one of the smallest members of the Organization of Petroleum Exporting Countries-one that includes a possible scenario of an end to Ecuador's oil exports by 2000.

PETROECUADOR'S NEW ROLE

Ecuador's state oil company is continuing efforts to complete its restructuring program. Much of the emphasis has been on decentralization.

Petroecuador has had considerable advice on the changes it's faced from foreign operators who acted as consultants, contractors, or equipment suppliers. Local staff also received assistance from foreign agencies such as the lnstitut Francais du Petrole, Mexican Petroleum Institute, and other Latin American state companies under the aegis of the Association of Latin American State Oil Companies, of which Petroecuador is a member.

Petroecuador will oversee the third phase of Ecuador's oil development. Oil has been produced commercially for almost 80 years on the Santa Elena peninsula. That was followed by the award of several concessions leading to oil discoveries in the Oriente basin and the creation of Petroecuador predecessor Corp. Estatal Petroleos Ecuatoriana (see OGJ Backgrounder, p. 25).

Two of those Oriente concessions still exist.

The one held originally by a joint venture of Texaco Inc., Gulf Oil Corp., and CEPE now produces about 220,000 b/d from 15 fields. CEPE acquired Gulf's interests in the 1970s.

An association contract City Investing Co. holds with Petroecuador east of the main concession accounts for another 5,000 b/d. Petroecuador accounts for another 65,000 b/d from 13 fields in its areas north of the joint venture concession.

Outside the Oriente, there is less than 1,000 b/d of production on the Santa Elena peninsula.

Texaco had been the sole operator of the so-called joint venture Oriente concession until June 1990, when that role passed to Petroecuador affiliate Petroamazonas. Texaco will continue as partner until June 1992, when its contract will expire.

JOINT VENTURE OPERATIONS

The joint venture concession dates to 1964, but Texaco relinquished much of the original acreage in 1974, trimming the concession to its current 1.186 million acres in the central Oriente.

In all, total investment in the concession has totaled about $750 million, breaking out as $350 million Texaco, $250 million Gulf, and $150 million by CEPE/Petroecuador. The bulk of those outlays came in the early days of the concession, and investments have plunged since 1988.

In all, Texaco has drilled 339 wells on the concession: 50 exploratory, 280 development, and 9 injection. Of the exploratory wells, 37 flowed oil. The rest were dry.

About 285 wells currently produce, most of them on artificial lift. Fields on production are Lago Agrio, Shushufindi, Aguarico, Sacha, Guanta, Dureno, Parahuacu, Atacapi, Auca, Auca Sur, Yuca, Yuca Sur, Culebra, Yulebra, and Cononaco. In 1984, waterflooding was introduced in the Shushufindi-Aguarico complex where production has remained fairly steady in recent years at about 100,000 b/d.

Since July 1990, when Petroamazonas took over operatorship, production climbed by 15,000 b/d to 220,000 b/d as of December 1990. The production boost came from increased workovers and improved maintenance of production facilities.

Joint venture capital and operating costs totaled about $100 million in 1990. Capital outlays totaled about $23 million, of which Petroecuador accounted for $11 million. About $8 million of that went for spare parts and maintenance of the Lago Agrio-Balao pipeline, operated by Petroecuador affiliate Petrotransporte since October 1990.

JOINT VENTURE PLANS

The Petroecuador-Texaco joint venture has earmarked $116 million for capital and operating costs in 1991. That breaks out to $73 million for operations and $43 million for capital outlays.

The venture in 1991 plans to hike production to 225,000 b/d through improvements in artificial lift programs and added maintenance at other production facilities, as well as introduction of another service to boost field workovers. In addition, plans call for five development wells.

In second half 1991, Petroecuador is likely to put out a tender for a tertiary recovery project in Shushufindi, for which Texaco and Occidental Petroleum Corp. have submitted separate proposals.

Texaco has offered to spend about $1 billion for a carbon dioxide flood to recover an incremental 500 million bbl of oil. Its project entails a $67 million pilot flood in the northern sector of the field using CO2 from P-80 field, south of Bermejo, in Petroecuador's area. If successful, CO2 recovery will be extended to the entire Shushufindi field for 20 years.

For the field wide flood, CO2 would come from Colombia's Putumayo fields or elsewhere. Oxy's proposal calls for a different approach involving optimizing primary and secondary recovery methods, new secondary recovery schemes, and eventually tertiary EOR.

Petroecuador is evaluating both proposals but wants more data on technical and economic implications before proceeding to draft specifications for the tender. First priority is an accurate reservoir model showing present condition of the field, taking into account all reservoir data obtained so far from seismic surveys, cores, well operations, and waterflood results, among other data.

Shushufindi field has been under waterflood since 1984. Although production has stabilized at about 100,000 b/d, there are problems with sweep efficiencies and water coning. Officials may decide to pursue other options before proceeding with tertiary EOR, such as infill drilling, more injection wells under a revised pattern, and horizontal drilling, among others.

If CO2 proves the best option from a technical standpoint, there still remains concern about supply and cost of CO2 domestically or imported. With all these parameters and need for additional documentation, the tender might be postponed beyond the second half.

PETROECUADOR'S OPERATIONS

After its establishment in June 1972, CEPE started exploration in 1974 in its huge area north of the joint venture concession. By 1980, it had confirmed sizable reserves in Secoya, Shuara, Shushuqui, and Tetete fields.

CEPE also explored the southern portion of the Oriente basin, where it found heavy crudes. Exploration was carried out in the coastal region, particularly in the Progreso basin, around the Gulf of Guayaquil and offshore. After extensive seismic surveys in the gulf, some wells were drilled there, with the only success Amistad gas field.

During 1974-1990, CEPE/Petroecuador conducted about 36,500 line km of seismic surveys in the three basins in which it is operator: 17,000 line km each in the Oriente and offshore and 2,500 line km on the coast.

Petroecuador claims a drilling success rate of about 55%.

In 1975, CEPE's first wildcat in the Oriente, 18-B-1, was an oil discovery. By 1982, CEPE had drilled 70 wells, including three in the Gulf of Guayaquil. In addition, CEPE drilled three wells in 1982-83 in the southern Oriente, where it found Amazonas and Balsaura heavy oil fields, which remain undeveloped because of the crude's low quality, distance to the country's trunk line, and lack of infrastructure.

In 1984, CEPE drilled a deep dry test in Sacha field before turning to development of earlier strikes in the late 1980s. A series of stepouts in Pichinchia, Tapi, Carabobo, Shushuqui, and Tetete fields indicated a single complex called Libertador. Cuyabeno, Sansahuari, Bermejo, and Charapa were developed separately. All these fields produce by natural flow, and their combined proved reserves total about 250 million bbl.

During 1987-90, CEPE/Petroecuador discovered or confirmed Tiguino, Pucuna, Paraiso, Coca, Contagallo, and Frontera fields. However, 1988 saw only 17 development wells drilled. Of 26 wells drilled in 1990, two were exploratory: 1 Chanangue and 1 Punino. The Chanangue discovery well, between Tetete and Frontera fields, flowed 829 b/d of light crude.

Tiguino and Pucuna fields were placed on stream in March 1990, 19 years after their discovery wells were drilled by Texaco and Anglo-Ecuadorian Oilfields Ltd., respectively. Tiguino reserves are estimated at 25 million bbl of 32 gravity oil. Pucuna reserves are 20 million bbl of 22-25 gravity oil.

1991 START-UPS

Petroecuador plans to place Cantagallo field on stream this year at an initial rate of 10,000 b/d, to rise to 15,000 b/d. Reserves are estimated at 45 million bbl, and gravity is 32-among the highest in the Oriente. Cantagallo is 10 km north of Sansahuari. Its discovery well flowed 11,640 b/d from five Cretaceous Napo zones.

Frontera field also may go on stream this year, the first developed jointly by Colombia and Ecuador. The field straddles the border with Colombia. Petroecuador drilled the discovery well and confirmation. Colombia's state owned Empresa Colombiana de Petroleos drilled 1 Quillasinga on the Colombian side and plans one more well to delineate its portion of the structure.

Negotiations on joint development are under way between Petroecuador and Ecopetrol. Crude may be pumped through the Colombian pipeline across the Putumayo River or through the Tetete-Lago Agrio line on the Ecuadorian side. In addition, Petroecuador this year will begin artificial lift programs in Libertador, Bermejo, Cuyabeno, Tetete, and Sansahuari fields.

Specific projects have been planned for each field for several years but have run into delays caused by additional studies and acquisition of equipment. Petroecuador's restructuring has speeded acquisition procedures, and equipment will be installed soon.

Petroecuador also will tie in its 5 million bbl 1 Singue discovery to nearby production. It flowed 1,776 b/d of oil on preliminary test.

Petroecuador is stepping up exploration in its operating areas as well. Seiscom Delta will run 3,400 line km of seismic surveys to 1993 covering the Palanda and Conga prospects south of Yuca field, Anaconda east of Yuca, Pindo east of Auca, and Palo Rojo.

That brings Petroecuador's seismic program to about 6,000 line km since 1989. Two or three exploratory wells are considered for 1991, with one at Palanda.

SERVICE CONTRACTS

A linchpin to Ecuador's plans to expand E&D was the 1982 legislation allowing foreign oil companies to undertake exploration under service contracts.

Since 1985, six bidding rounds have yielded 13 contracts, of which 10 are in the Oriente and three along the coast and offshore. Petroecuador is negotiating three more contracts involving Oriente blocks with ARCO, Conoco Inc., and Mobil Oil Corp.

Exploration in service contract areas has led to discovery of about 250 million bbl of reserves, mostly heavy crude.

During 1972-82, when exploration in Ecuador was limited to CEPE and Texaco, additions to reserves were far below production levels at about 95 million bbl/year. By 1980, it was evident a change in legislation was needed to revive foreign interest in Ecuadorian E&D, especially with the Oriente still largely unexplored.

WHAT'S INVOLVED

Companies seeking to explore in Ecuador are required to participate in periodic bidding rounds by Petroecuador.

Contracts generally call for a certain level of investment for seismic surveys, drilling exploratory wells, and training Petroecuador personnel. The exploration period covers 4 years with two extension options. If successful in finding commercial reserves, subject to Petroecuador's determination, companies enter a 20 year production phase.

Oil produced belongs solely to Petroecuador. Companies are reimbursed for investments and production costs, either in crude from their blocks or in cash. Exploration investments are reimbursed monthly during the first 5 years of the production phase. Development investment is reimbursed yearly during the first 1 0 years of the production phase. Production costs are reimbursed monthly during the production period. Further exploration investments during the production phase also are reimbursed monthly during a 5 year period, if more reserves are found. Reserve evaluation costs are considered part of exploration investment.

As compensation for all services rendered to Petroecuador in finding commercial reserves, companies also receive a monthly fee during the 20 year production period. Service contract companies pay no surface rights or royalties or taxes on reimbursements.

The fee companies receive for their risks to find and produce oil is taxed at a 44.6% rate under the state's income tax law. This rate is reduced to 25% for the portion of the fee reinvested in the country.

Taxable income is determined by taking into account all deductible items and operating costs. A sliding scale production tax also applies only if production exceeds 30,000 b/d: 3% for production at 30,000-40,000 b/d, 4% for 40,000-50,000 b/d, and another percentage point for each additional 10,000 b/d. Excluded from the production tax are crudes of less than 15 gravity.

The tax paid is treated as deductible item for the computation of income tax. Income tax is calculated after deducting also the 15% for workers' profit sharing, applicable to all companies in Ecuador.

SERVICE CONTRACT COMPANIES

Companies involved in service contracts in Ecuador are Belco Petroleum Corp. Blocks 1 and 2, a combine of Texaco and Pecten Ecuador Co. for Block 6, Oryx Energy Co. Block 7, a combine of Exxon Corp. and Hispanica de Petroleos SA Block 8, Petro-Canada Block 9, ARCO Block 1 0, a combine of British Gas plc, Yukong Ltd., and Maersk Oil & Gas AS Block 12, a combine of Unocal Corp., Union Pacific International Petroleum Corp. and Nedlloyd BY Block 13,a combine of Soc. Nationale Elf Aquitaine, Braspetro SA, and Yacimientos Petroliferos Fiscales SA Block 14, Occidental Petroleum Corp. Block 15, a group led by Conoco Ecuador Ltd. Block 16, and a combine of Braspetro, Elf, and Britoil plc Block 17.

In all, foreign investment commitments in service contracts in Ecuador total $400 million. That includes 19,463 line km of seismic surveys, 56 exploratory wells, and about $8.5 million for training.

Spending by companies generally exceeds the amount called for by contract- nearly double for some companies.

Of the 13 contracts signed, only 10 are in operation at present. Texaco-Pecten, Exxon-Hispanoil, and Belco wound up operations in Blocks 6, 8, and 2 (OGJ, Apr. 10, 1989, p. 85). Of contracts in operation, commercial reserves have been discovered by Oryx in Block 7, Oxy in Block 15, and by the Conoco group in Block 16. Combined reserves are estimated at 250 million bbl, and gravities range from 15-18 to 29-30.

DEVELOPMENT PLANS

Development plans in service contract areas have long awaited approval by the government, and delays of many months have hindered continuity of operations.

Oryx which acquired British Petroleum Co. plc's interest in Block 7, has started production at 1,700 b/d in Coca-Payamino field from reserves estimated at 45 million bbl.

Production is to rise to 11,000 b/d by yearend. This rate will be maintained for 2 years, declining thereafter at 10.23%/year.

The field is in the northern sector of the block and extends into Petroecuador's areas. Nine wells have been drilled on the structure: seven by Petroecuador in the northern portion and two by BP in the southern portion. Oryx holds a 35% interest in the unitized field with the remainder held by Petroecuador.

Initial development calls for another four more wells, with possibly three more later.

About $39 million is budgeted for Coca-Payamino development. Of this amount, $27 million will be spent for four more wells, workovers or completions of existing wells, production facilities, and reservoir studies. Petroecuador will pay Oryx in crude for its risk fee, and Oryx will market its share of exports. Oryx also plans to step up exploratory and appraisal drilling on several other Block 7 prospects and discoveries.

Oxy, the first to sign a service contract in January 1985, is still drilling exploratory wells. The initial 4 year exploration period was suspended by force majeure for nearly 2 years. Four wells were drilled before then: 1 Limoncocha flowed 2,200 b/d of 23 gravity oil, 1 Palmeras was dry, 1 Itaya flowed 350 b/d of 15 gravity oil, and 1 Indillana flowed 1,200 b/d of 23 gravity oil.

Oxy resumed exploration in 1990. By the end of November 1990, Oxy ha tested its 1 Jivino strike, which flowed a combined 3,692 b/d of oil from three Cretaceous Napo/Hollin zones-870 b/d of 18 gravity oil from U sand, 950 b/d of 26.4 gravity oil from Hollin, and 1,872 b/d of 27.8 gravity from T sand. The Jivino strike is in the western portion of Block 15, where other structures have yielded oil, with reserves estimated at 30 million bbl. To evaluate continuity among the structures, Oxy will drill three more wells, beginning with 1 Laguna early this year.

The British Gas group drilled the four wildcats on Block 12: 1 Tigrillo, 1 Manati, 1 Danta, and 1 Garza, with mixed results. Only 1 Danta was successful, flowing 1,934 b/d of 18.2 gravity crude. The well is near the boundary with Unocal's Block 13, where Unocal was to spud the 2 Danta delineation well 2 km to the north last month. The British Gas group has spent about $50 million on Block 12 work so far, exceeding by about $20 million the original contract amount.

Belco suspended operations on offshore Block 2 after drilling dry holes there. Some of its drilling obligations were passed on to Block 1, where the company wants to continue operations. Block 1 includes a small onshore area near Ancon, where oil has been produced for 60 years. Belco's Mata Chivato discovery on Block 2, its fourth well on the block, flowed 500 b/d of 34 gravity oil. Production tests continue. Three or four more wells are planned on the block.

The Elf group's 1 Wanke discovery on Block 14 flowed 1,200 b/d of 17 gravity oil (OGJ, Dec. 17, 1990, p. 32). It was the third of four exploratory wells contracted. Two previous wells yielded only minor shows of low quality crude. Elf plans soon to spud its fourth exploratory well on the block, 1 Kintia, programmed to 11,000 ft.

ARCO and Unocal, newcomers to the service contract scene in Ecuador, are carrying out exploration campaigns on Blocks 10 and 13. ARCO has no drilling obligation but has completed seismic surveys.

Unocal has conducted 1,650 line km of seismic lines and drilled the 1 Ramirez and 1 Masaramu wildcats. Ramirez flowed 800 b/d of 12-14 gravity oil, and Masaramu was plugged without testing. In addition to the 2 Danta appraisal under, Unocal plans four wells this year out of a total of seven contracted with Petroecuador. Average depth of wells drilled and planned is 13,500 ft. Total planned outlays will exceed the $58 million originally contracted.

Petro-Canada's Cachiyacu and Golondrina wildcats yielded oil shows on Block 9. It is mulling a farmout.

Three more service contracts are being negotiated: Mobil for Block 18, a combine of ARCO and Mobil for Block 19, and a Conoco group for Block 22. Mobil proposes to spend $6.7 million to conduct 1,055 line km of seismic surveys, ARCO-Mobil $8 million for 1,286 line km, and the Conoco group $84.2 million for 2,000 line km and eight exploratory wells.

Negotiations with the three groups have bogged down over the risk fee.

Blocks 18 and 19, far from existing infrastructure, have never been explored. Conoco's block 22 is next to its Block 16, where it has confirmed 200 million bbl of oil and plans Ecuador's first heavy oil development (OGJ, July 23, 1990, p. 23). Petroecuador has approved Conoco's Block 16 plan, but approval still is required from the Ministry of Energy.

Meantime, Petroecuador plans another tender for exploration covering two blocks in the Oriente and one on the coast. Although the blocks have not been determined, likely choices are Oriente blocks south of Bermejo and east of Cuyabeno and a third in the Progreso basin.

OUTLOOK

Petroecuador hopes current development and enhanced recovery efforts will enable it to increase its oil reserves by 1 billion bbl.

About 500 million bbl would come from added incremental recovery at Shushufindi. Another 300 million bbl would come from development projects in the Conoco group's Block 16, Oxy's Block 15, and Oryx's Block 7.

That figure could rise as delineation drilling confirms still more reserves in service contract areas, notably Unocal's results by yearend. And Petroecuador's recent discoveries could add another 200 million bbl.

There remains significant potential in Ecuador's frontier areas: large unexplored areas of the Oriente, the coastal region, the Gulf of Guayaquil, and Manabi and Esmeraldas offshore areas.

In the Oriente, prospective areas lie in the sub-Andean belt and east of the basin's axis toward Tiputini. These areas have been reserved for Petroecuador so far, but some sectors might be tendered to foreign oil companies. Along the coast, the Progreso basin north of the gulf may be also offered for exploration.

Much of what remains to be discovered depends on how well the government can expedite contract negotiations and the approval process, as well as balance environmental, native, and development concerns.

Petroecuador is expected to play a key role in that effort by streamlining its procedures and reducing labor demands that threaten to undermine operations.

Oil company officials contend that if Ecuador is to speed its development and sustain oil exports well into the next century, the government faces a series of sound and timely decisions.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.